1. Low level of harmonization of Restructuring and Insolvency law in the European Union
Restructuring and insolvency law is far from being fully harmonized at the European level. While a harmonized restructuring and insolvency law of the European Union ("EU") does not exist as of now, that could change in the future (and, as further outlined below, an important first step has been taken recently with the EU Restructuring Directive). Notwithstanding the principle of "subsidiarity" (article 5 para 3 of the Treaty on the European Union) which describes the principle of a limited transfer of competences from the EU Member States ("Member States") to the EU, it is generally recognized that the EU would have the competence to impose a further harmonization of the insolvency laws of the Member States under Article 115 of the Treaty on the Functioning of the European Union. Such harmonization would need to be done with the aim of enhancing the functioning of the common market and through the legislative instrument of an EU Directive, which would have to be implemented into the national law by the different Member States (instead of an EU Regulation, which would apply directly in all Member States).
However, until recently the EU has been reluctant to take significant steps in this direction. Insolvency law is traditionally a very national field of law which concerns important sovereign tasks with a lot of national particularities. After all, an insolvency can be described as the enforcement into and the realization of the debtor's assets through an orderly and structured (court) process which is typically steered by a state-appointed insolvency representative with significant statutory powers. In consequence, the restructuring and insolvency laws of the various Member States reflect their different legislative cultures and they differ significantly even with regard to fundamental principles and aspects.
2. The European Insolvency Regulation
The existence of the (Recast) European Insolvency Regulation (Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015) ("EIR"), which has replaced its very similar predecessor of the year 2000 (Regulation (EC) 1346/2000), does not generally change the above described picture. The EIR does not provide for a material harmonization of the national insolvency laws, but rather provides a set of conflict of laws rules for the field of insolvencies. Most importantly, Article 3 of the EIR establishes the well-known "COMI" principle which says that the courts of the Member State within the territory of which the centre of the debtor's main interests ("COMI") is situated shall have jurisdiction to open insolvency proceedings. The EIR further specifies that the COMI shall be the place where the debtor conducts the administration of its interests on a regular basis and which is objectively ascertainable by third parties. Furthermore, the EIR ensures that the opening of insolvency proceedings in one Member State is recognized in all other Member States (although the recent Niki Airlines case has shown that conflicts may still arise).
3. The European Restructuring Directive
In 2019, the EU took a first big step in the direction of a material harmonization of restructuring and insolvency law in the EU Member States through the EU Restructuring Directive of 20 June 2019 (EUR 2019/1023) ("EU Restructuring Directive"): All 27 Member States were obliged to implement the EU Restructuring Directive at the latest by 17 July 2021 (but many Member States have made use of the option to prolong the deadline for implementation by one further year). The purpose of the EU Restructuring Directive is to reduce differences between the Member States regarding the range of procedures available to debtors in financial difficulties, which allow them to (financially) restructure their business. Up to now, some Member States do not have any dedicated restructuring tools or only procedures which allow the restructuring of businesses at a relatively late stage. In other Member States, restructuring is possible at a (very) early stage, but the procedures available are very formal or not as effective as they could be. The EU Restructuring Directive was also in part a reaction to the "forum shopping" phenomenon observed with continental European companies in a financial crisis especially using the English Scheme of Arrangements in order to restructure their debt.
The English Scheme of Arrangement, which is not an insolvency procedure, offers the possibility to implement a collectively binding debt restructuring on the basis of a majority decision of the creditors. Under these rules, a single "hold-out" creditor is in principle unable to block a reasonable restructuring (plan) if the majority of the creditors approves it. Many Member States did not offer such a valuable possibility outside of an insolvency procedure, with the consequence that debtors were often forced to enter insolvency proceedings, if a consensual out-of-court solution was not possible. However, in many cases, insolvencies are value-destructive and lower the prospects of recovery for creditors.
For these reasons, the EU Restructuring Directive made it mandatory for Member States to offer a "preventive restructuring framework" for companies in a financially distressed situation when there is a likelihood of insolvency, with a view to preventing the insolvency and ensuring the viability of the debtor. Distressed debtors should be given the possibility to (financially) restructure their debt under the protection of individual enforcement actions on the basis of the majority of the creditors' decisions. Moreover, according to the EU Restructuring Directive, new financing, interim financing and other restructuring-related transactions should be protected against avoidance actions in case the restructuring fails and the companies still file for insolvency. However, as is characteristic for directives, the Member States have some leeway in their implementation decisions. Some European Member States went ahead and their "national schemes of arrangement" have already entered into force (for instance The Netherlands and Germany). Other Member States are still to follow.
At the end of this process, we expect to see - at least with respect to the core principles - very similar preventive restructuring regimes in the different Member States.
4. Status of Implementation of the EU Restructuring Directive in Selected Member States
Please see the "New European Restructuring Schemes - Update May 2022" published by Baker McKenzie for an update of the status of the implementation of the EU Restructuring Directive in selected Member States.